Super performance test review must set a high returns bar

Given the dramatic change that has flowed through the industry you could be excused for asking whether the current performance testing framework has run its course.

It has delivered its policy goal of improving consumer outcomes and could be replaced with a more nuanced assessment of performance against a fund’s strategic investment goals.

The Treasurer’s review of superannuation performance cannot be perceived as lowering investment return expectations.

As it is unlikely Canberra would choose to repeal the test and take away responsibility for investment decisions from the nation’s chief investment officers, who are arguably best positioned to invest on behalf of their members, it is more constructive to instead focus on where the federal government’s new review could instead focus.

Although only implemented in 2021, the performance testing framework has already been reformed with the support of the superannuation and funds management industry.

Following a wide-ranging review, the assistant treasurer implemented modest, but important, improvements to the benchmarks to ensure superannuation funds are not discouraged from investing in asset classes that generate strong risk-adjusted returns for consumers.

The treasurer has now foreshadowed another review of the performance benchmarks, the second in as many years, in response to industry feedback that the test constrains their capacity to invest in the government’s national economic priorities.

The Financial Services Council (FSC) welcomes a focus on whether the performance test constrains the uptake of emerging investment opportunities.

After all, it is the superannuation funds that are innovative in the investment strategies that can generate outperformance and deliver their consumers higher stands of living in retirement.

There should be a high bar set, however, before the government implements further changes to the superannuation performance test.

Tinkering comes at a cost as trustees are forced to repeatedly re-evaluate and adjust their investment strategies and shift investment mandates.

The bar set for this new review must necessarily be whether the evidence demonstrates that Australians will retire with more income in retirement than would otherwise be the case.

There are clearly enormous funding challenges for the country to deliver our transition to a clean energy future, build our sovereign defence capabilities, and boost our supply of housing – each of which are important national goals.

Options worth considering

However, these goals should not be achieved at the expense of Australia’s current and future retirees.

The treasurer is yet to release a discussion paper to inform the review, but there are options industry believes are worth considering.

On the transition to a low carbon economy, for example, are there suitable ESG benchmarks that would better reflect the investment profiles of climate-conscious products, rather than using the existing benchmarks like the S&P/ASX 300 Total Return Index for Australian equities?

The FSC would add to the discussion options for how the industry can collaborate more constructively with ASIC on our common goal of facilitating investment that supports the climate transition.

The review must focus on investment issues, consistent with the Treasurer’s national economic goals, to avoid rehashing old policy debates connected with the broader Your Future, Your Super package of reforms.

Aside from facilitating the departure of underperforming MySuper products, performance testing has successfully reduced industry fees by basing performance calculations on current fees, rather than historical fees. This creates a strong incentive for funds to reduce their fees for consumers, and the evidence shows that the median administration fee for a $50,000 representative member of MySuper products has fallen from 0.33 per cent in 2021 to 0.26 per cent as of June 2023.

In a fundamental shift of superannuation industry orthodoxy, Rainmaker data demonstrates fees are now level for retail and not-for-profit funds, dramatically changing the competitive dynamics of the industry.

The FSC also welcomes the treasurer ruling out changes to the best financial interest duty from the review given his view that it is fundamental to superannuation that the first priority is to deliver greater returns for fund members.

To maintain confidence in the superannuation system, the treasurer’s review of superannuation performance cannot be perceived as lowering investment return expectations.

The evidentiary hurdle must be, and should always be, will it result in higher standards of living for retired Australian?